V&IWhy they are no Art

In recent years, few topics in the technology world have been as controversial as the idea of Non Fungible Tokens (NFTs). In the blockchain world, this concept has made waves and experienced an unreal hype, full of scams and false promises. Yet the NFT vision is indeed very promising. But it will be some time before the first significant use cases emerge from the experimental phase and reach the real economy.

In this blog article, we would like to discuss why NFTs are not art and what potential opportunities NFTs actually offer

What are NFTs?

NFTs can be considered as a type of asset that represents ownership or proof of authenticity of a unique item or asset. In this context, the proof of ownership is verified using the Distributed Ledger Technology. For the first time, the emergence of NFTs has made it possible to create a digital proof of ownership of an object that is forgery-proof and transparent. As such, NFTs are a type of a digital counterpart to the “original” in the physical world.

Each NFT is unique and contains metadata which, together with the token ID, determines the uniqueness of the NFT. The metadata can include information such as the creator, the date of creation and any specific features or characteristics of an object.

This uniqueness makes NFTs a collectible and speculative item in the world of digital collectibles, art and other forms of digital content.

NFTs also offer creators the opportunity to monetize their work in a new way. Through the underlying smart contract, creators can tap into new sources of income by participating in every resale of their products through the implementation of license fees (royalties). NFTs therefore have the potential to influence many areas of the real economy and create new use cases in the fields of real estate, virtual fashion and banking.

In theory, NFTs have created a new potential market for digital property and unique assets, allowing creators and users to participate in a decentralized economy. As such, NFTs also play a key role in the tokenization of assets.

NFT - Standards

When we talk about NFTs, we usually refer to smart contracts that are implemented on a blockchain such as Ethereum. For Ethereum, a community has been formed that defines standards (ERC standards) for the Ethereum platform. These standards are specified in the form of the Ethereum Improvement Proposals (EIPs). In addition to Fungible Tokens (e.g. ERC-20), various token standards that cover the area of Non-Fungible Tokens have also become established.

In terms of creating NFTs, the ERC-721 Token Standard has established itself as the best-known form. Other standards for NFTs have gradually emerged, such as the ERC-1155 Token as a multi-token standard, which has proven to be particularly interesting for developers in the gaming industry. The ERC-6551 Token, on the other hand, represents an extension of the current standards, allowing NFTs to execute their own smart contracts and therefore also receive their own (fungible) tokens and execute transactions.

Fundamentals of NFTs

The primary principle from which all use cases relating to NFTs develop is the counterfeit protection and traceability of an NFT and the metadata associated with it. This results in three categories of application fields, each of which can be divided into its own subcategories.

The NFT Identity summarizes all areas that are used to enable access. This can be access to a decentralized app as well as a real entry ticket or a wallet address for receiving cryptocurrencies.

The term NFT Connect is used when a digital and real asset is linked to the metadata of the NFT and the blockchain and a real connection between the NFT and the connecting element is derived from it. Real goods represent artworks or various capital goods such as real estate, gold or securities. Digital goods, on the other hand, can be music, videos or game characters.

NFT Rights cover all areas of the NFT that grant real rights to the real person behind the NFT. These can be rewards for completed quests, rental income or video and music streaming income.

NFT Use Cases

In theory, NFTs provide endless possibilities for a new type of digital and tokenized economy. In practice, however, such solutions have not yet arrived. Many projects have started with unrealistic promises or a non-scalable business model and have not been able to fulfill the expectations placed on them.

Nevertheless, real use cases have also developed in the mass of projects, which could also find their way into practical usage once the Web 3.0 sector matures in the medium to long term.

One possibility offered by NFTs is the establishment of a digital identity. As the TokenID cannot be falsified, NFTs can provide all the necessary information in the metadata that is required to prove an identity. One project dedicated to digital identity is the Ethereum Name Service (ENS).

Another use case for NFTs is the digital twin. Here, we are talking about NFT representations of real entities.  These can be digital NFT twins of books or educational certificates.

The goal of music NFTs is to enable artists and fans to participate on streaming revenues from songs, records or music videos. Some US artists have already successfully distributed NFT music boxes as limited editions to their fans.

NFT patents are an approach to tokenize intellectual property with the help of NFTs. The goal is to better protect, store and manage intellectual property. One example of digital patents is currently being implemented by IBM, which stores patents as NFTs on its own IBM Cloud and blockchain service.

NFTs can also be used in the real estate sector. Using an NFT as a certificate of ownership eliminates the need for a notary and the change of ownership can take place within a few minutes if an agreement is reached.

Another use case for NFTs concerns the tokenization of assets such as art or collectibles. Paintings or vintage cars can be tokenized and, if necessary, divided among many partial owners as fractionalized investments.

Outlook - The future of NFTs

Even if overpriced monkey pictures polarize the population, such controversial concepts should not lead to a hasty judgment of Non Fungible Tokens, but rather use the skeptical interest that has arisen to highlight the future-oriented use cases.

NFTs undoubtedly have the potential to create a new type of economy from which manufacturers and owners can benefit. Depending on the use case, different token standards have emerged. Many existing projects are still in the early conceptual development phase, but offer promising approaches for a new level of digital ownership.

The technology and its adaptation are still in their early stages, as there is still a lot of educational work to be done and there is also a lack of significant lighthouse projects that are designed for the masses and thus enable integration into the real economy.

The current challenge is to determine the regulatory clarity for these asset classes and to create the necessary technical infrastructure in order to convince the majority of the population of their benefits and thus finally integrate them into the real economy.